Facilitation Council Is Empowered To Take Up Dispute For Arbitration After Supplier’s Registration Under MSMED Act, Says Calcutta High Court

The Calcutta High Court recently observed that the Facilitation Council is empowered to take up a dispute For Arbitration after a supplier’s registration under the MSMED Act. Court further stated that the Facilitation Council has exclusive jurisdiction to entertain the dispute brought to it by the petitioner and decide on it under section 18 of the MSMED Act.

The single Judge Bench of Justice Moushumi Bhattacharya while dealing with a petition filed under section 34 of the Arbitration and Conciliation Act, 1996 observed that the Micro, Small And Medium Enterprises Development Act, 2006 (MSMED, Act 2006) would prevail over the A&C Act since the former is a special statute.

BACKGROUND OF THE CASE

Certain disputes arose between the petitioner, Marine Craft Engineers Pvt Ltd, and the respondent, Garden Reach Shipbuilders and Engineers Ltd, out of the purchase order issued by the latter. As a result, the petitioner/supplier referenced the MSMED Act before the West Bengal State Micro Small Enterprises Facilitation Council. In the interim, the respondent invoked the arbitration clause in the purchase order and appointed an Arbitrator who rendered a favourable award.

Marine Craft challenged the arbitral award passed by the Arbitrator by filing a petition under Section 34 of the A&C Act before the Calcutta High Court.

Marine Craft argued that the Facilitation Council had exclusive jurisdiction to resolve the dispute due to the pending reference before the Facilitation Council and the non-obstante clause under Section 18 of the MSMED Act.

Marine Craft asserted that it was a "supplier" within the meaning of Section 2(n) of the MSMED Act. As such, it could make a reference to the Facilitation Council under Section 18 of the Act for the recovery of the amount owed to it under Section 17.

In response, the respondent, Garden Reach, argued that the petitioner was only registered as an SME under the MSMED Act after the contract between the parties was executed. It asserted that the dispute referred to arbitration could not have been adjudicated by the Facilitation Council because it did not fall within the scope of Sections 17 or 18 of the MSMED Act.

Referring to the facts of the case, the Court observed that the Letter of Intent (LOI) or the purchase order was issued prior to the date the petitioner, Marine Craft, was registered as an MSME under the MSMED Act.

However, Marine Craft’s demand for payment was made with reference to the work done and services rendered by it after its registration under the MSMED Act, the court took note.

The Court referred to the Apex Court's decision in Shanti Conductors Pvt Ltd vs. Assam State Electricity Board (2019), in which the Apex Court dealt with "The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993," which was the predecessor to the MSMED Act.

The Supreme Court interpreted Sections 3 and 4 of the 1993 Act, which were identical to Sections 15 and 16 of the MSMED Act, in the aforementioned case. It had concluded that the consumer is obligated to pay interest if the supplies are made after the effective date of the 1993 Act, even if the contract was executed prior to the effective date of said Act.

Thus, the High Court concluded that the date of execution of a contract between a buyer and a supplier under the MSMED Act is irrelevant to the application of the provisions of the MSMED Act, so long as the supplier claims recovery of the amount due under Section 17 for the goods supplied or services rendered after the date of its registration under the MSMED Act.

The court said, “the Facilitation Council had exclusive jurisdiction to entertain the dispute brought to it by the petitioner and decide on it under section 18 of the Act. Under section 18, the Council is also empowered to take up the dispute for arbitration and the provisions of The Arbitration and Conciliation Act, 1996 shall automatically kick in and apply to the dispute as if the arbitration was in pursuance to an arbitration agreement under section 7(1) of the 1996 Act.”

The court further said, “In other words, whether the supplier was registered as an MSME on the date of the contract would not disqualify the supplier from making reference to the Micro and Small Enterprises Facilitation Council under section 18 for recovery of outstanding amounts as long as the amounts claimed are relatable to goods supplied or services rendered after the date of registration of the supplier as a micro, small or medium enterprise under section 8(1) of the Act.”

The court observed that the award holder had invoked the arbitration clause contained in the Contract and had proceeded with the arbitration despite being fully aware that the reference before the Facilitation Council under the MSMED Act was pending. The Court concluded that the same was patently contrary to the provisions of the MSMED Act.

“The impugned Award dated 23.9.2018 by which the claim of the respondent (which was the claimant in the arbitration proceedings) of Rs. 30,24,849/- was allowed in full is hence in the form of a face-off with the provisions of the MSMED Act so to speak,” the bench held.

The court stated that the date of execution of a contract between a buyer and a supplier under the MSMED Act does not matter for the application of the provisions of the said Act.

Case Title: Marine Craft Engineers Pvt Ltd vs. Garden Reach Shipbuilders and Engineers Ltd.

Statute: Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), Arbitration and Conciliation Act, 1996